Brazil: The first signs of economic recovery

Manuel da Silva Filho is, as usual, at San Pablo's central market, where he supervises the 30,000 tons of oranges, papayas and mangoes that he receives before distributing the merchandise in stores throughout the megalopolis.

Lately, however, the veteran fruit seller has been witnessing a sharp drop in prices, something very uncommon in his more than forty years experience at this job.

"This is the first time that prices have fallen so low in the last 10 years," he said. "I would estimate that fruit prices are 7% lower than last year."

According to the IBGE statistics agency, Brazil is experiencing an historically low inflation period, contrary to what is usual in the country.

In the first nine months of the year inflation was 1.78%; the lowest in 19 years. A year ago inflation by September was 2.54%. The central bank's target was 4.5%, with a 1.5% margin.

Reduced inflation was 11% in early 2016, allowing the economy, which is barely emerging from its worst recession, to have a respite.

It also raises doubts about whether Brazil can finally defeat one of its oldest enemies: in the early 1990s, inflation was advancing at annual rates close to 5,000%.

"Our first objective is to reduce inflation and interest rates," stated Ilan Goldfajn, Brazil's central bank chief, in an interview. "Our second objective is to be able to permanently keep inflation and interest rates low."

Economists attribute much of these declines to the recession. With the economy contracting more than 7% in two years, the number of unemployed people increased to more than 13 million in Brazil.

They also think that the strong economic team assembled by the now besieged President Michel Temer, who took over last year after the dismissal of his predecessor Dilma Rousseff due to budget violations, had an influence in this decrease.

The Minister of Finance, Henrique Meirelles, sought to stabilize the growing budget deficit while Goldfajn reiterated the central bank's commitment to its inflation targets.

In addition, the plentiful harvest brought down food prices for five consecutive months. The value of food for consumption in households fell by 5.3% year-on-year in September. That includes politically sensitive commodities like tomatoes and beans, which fell 11% and 9.4% respectively.

The disinflation allowed the central bank to continuously cut the benchmark Selic rate from a high of 14.25% to 8.25%; and economists predict that it could decrease to 7% or 6.5%.

However, according to Goldfajn, fiscal reforms are needed, including changes to Brazil's generous pension system, which would raise the minimum retirement age from 55 to 65 years, to keep rates low in the long run. "If that happens, it would probably be one of the main changes in the Brazilian financial system and the Brazilian economy," he said.

Economists say that the government of Temer achieved some major tax reforms, such as a new law to reduce subsidized loans offered by the national development bank.

It also introduced a cap on government spending prohibiting inflation from rising.

But, since the government of Temer has been weakened by corruption scandals, the crucial reform of the pension system is likely to have to wait until after the next elections in 2018.

"In the fiscal area, progress is slow and rather limited, and it will leave a very complex fiscal legacy for the next administration," said Alberto Ramos, an economist at Goldman Sachs.

Others wonder if all Brazilians really lament the end of high inflation. The high prices and the interest rates that accompanied them created a lucrative market in the treasures of the government. With "risk-free" real returns approaching 7% in recent years, the upper middle class and wealthy investors did not have to buy other more volatile asset classes, such as equities.